Depositary banks and secured parties have difficulty administering commercial deposit accounts that are pledged by their depositor-debtors as security and that are subject to a deposit account control agreement among the debtor, the secured party, and the bank (a “DACA”). Implementing a DACA requires a bank to keep employees available to the secured party to receive and implement the secured party's instructions to terminate a debtor's access to and disposition over its account. The bank also exposes itself to the risk, among others, of being sued by the secured party or other claimants when the bank implements the secured party's instruction to terminate the debtor's access to and disposition over its account or other instruction of the secured party concerning the account.
There is also a delay between the time that the secured party determines that the debtor has defaulted on its loan obligations to the secured party and the time of the termination of the debtor's access to and disposition over its aAccount. Once the secured party determines that the debtor is in default, the secured party must contact the bank, convince the bank's employee(s) that the secured party has the right under the DACA to instruct the bank to terminate the debtor's access to and disposition over the account, and then wait while the necessary procedures are undertaken by the bank to implement the secured party's instruction to terminate the debtor's access to and disposition over the account. During this period of time between the secured party's instruction and the implementation thereof by the bank, the debtor has the opportunity to withdraw funds from the account, thereby diluting the secured party's security interest in the account.
Banks incur significant legal and business risks and administrative expenses in entering into and implementing DACAs, and secured parties are exposed to the risk that the debtor may have the opportunity to withdraw funds from the account before the secured party can terminate the debtor's access to and disposition over the account. Therefore, a need exists for an improved way for banks and secured parties to implement DACAs without the current disadvantages.